Would You Rather Be Rich?

When I talk with folks about their retirement income, or planning their retirement income, we discuss various savings and investment vehicles that we could use. This discussion often runs the gamut, from CDs to gold to the stock market and just about everything in between. Not surprisingly, most people in or near retirement want to know that their money is safe and that their income is or will be secure and sustainable. What could be worse, financially speaking, than running out of money before the Good Lord calls us home?

So we talk a good bit about what we are trying to accomplish. What is our objective? For whom are we planning, just one retired person or couple, or is beneficiary planning an integral part of the process? And of course we talk about risks and rewards. In the case of market-linked or risk-based investments we talk about potential rewards, along with the probability of achieving our objectives and the possibility that the stock and bond markets could deliver losses instead of gains. I have heard it said that ‘the probability of an event happening is not as important as the effect of that event, should it happen’. In other words, the odds of a stock market crash happening aren’t as important as the effect of a market crash if one is (too heavily) invested in the market.

Often when we discuss ‘safe-money investments’, meaning savings or investment vehicles where the principal is protected from loss, the conversation turns to market-lined investments like index annuities. More and more people are hearing about them and how they can be used in to generate income, growth or both. People love the fact that they can participate in stock market gains but are protected from loss when the market goes down. They like tax deferred interest and they like the fact that the index annuity can deliver an income stream that they cannot outlive (a feature unique to annuities) if they decide to exercise this option as some point in the future. They like these features enough that they are willing to make a time commitment with the funds that they invest in index annuities, which means that they can only withdraw up to 10% of the account per year without penalty until the annuity “matures”.

But occasionally a prospective client gets hung up on one of the very features that attract them to these vehicles in the first place: potential stock market participation without risk of loss. Because that downside protection comes with a price: you don’t get all of the gains when the stock market goes up. Naturally we want all of the gains, all of the growth of the stock market when is doing well, and just as naturally we don’t want to lose money when the markets “correct” or worse, crash! So if this sounds familiar, here’s a question for you:

Would you rather be rich, or make sure that even if you run out of money you never run out of income? Index annuities can deliver reasonable rates of return without risk to your principal, and can ensure that your income lasts as long as you do, even if your other accounts run dry.